Five Reasons Why Altria is a Better Investment Than PM?
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The recent decline of Altria Group Inc. (NYSE: MO) rekindled my curiosity about the company so I decided to take another close look at its performance. For those among you who consider adding a tobacco company to your portfolio and contemplate between Altria and its international counterpart Philip Morris International (NYSE: PM) here are several aspects worth considering that, in my view, puts Altria head and shoulders above Philip Morris as a long term investment, especially for American investors.
No Currency Uncertainty
One of the main problems that Philip Morris International is facing is currency uncertainty (more known as currency risk). Since the company operates in so many places around the world the changes and fluctuations in major exchange rates puts the company at a level of uncertainty. Keep in mind that even though there are situations in which the company will gain from certain currency changes – E.g. in 2011, PMI’s diluted earnings per share grew by 0.19 due to favorable currency changes – it still puts the company’s revenues at an undesirable uncertainty.
Less Competition
Even though there is a perfect competition in the U.S tobacco market, the dominance of Altria’s brand is still strong. With nearly 50% of the market, the company has a very strong hold on American tobacco consumers. On the other hand, the competition that Philip Morris International has to face in many countries cuts deep into the company’s profit margins and market share.
During the year, Altria rose by a higher rate than Philip Morris International did. Making this comparison could be very tricky because the best comparison would be over a very long period of time (say 10 to 15 years at least) so we should take this point with a grain of salt. Nonetheless, at face value Altria continues to outperform not only the S&P500 but also Philip Morris International. The chart shows how Altria’s stock rose by a higher rate than Philip Morris International during 2012.
High Profitability on Other than Cigarettes products
Besides the obvious products Altria is selling – all its cigarettes brands – the company also offers several other products that are related to the company’s core business and yet they offer much higher profit margins: during 2012, the company sold Smokeless cigarettes that account for nearly 14% of the company’s operational profits. The operational profitability from selling this product was 52%; as a comparison, the operational profitability of selling cigarettes was 26%. Another product worth mentioning is cigars: they also have higher profitability than cigarettes with nearly 29% margins. But this product only accounts for 3% of the company’s total operational earnings.
To the best of my knowledge Philip Morris International doesn’t sell these products (there is no mention of it in the company’s financial reports).
Due to the two reasons listed above – regarding competition and certain products that yield higher profit margins this leads to the next point:
Higher Profit Margins
During recent years the operational profitability of Philip Morris International was much lower than Altria’s.
The table below presents a comparison between the two companies in terms of operational profitability between the years 2009 and 2012 (the first two quarter of the year).
Higher Dividends
One of the main payoffs an investor could receive when investing in asset (in this case a stock), besides theappreciation of the stock, is the company’s divided it offers, usually on a quarterly basis.
Among the major tobacco companies, Altria is paying a high dividend, with a yield of 4.8%. Philip Morris International only offers a dividend yield of 3.4%. Other companies offer a range of dividend yields: Reynolds American Inc. (NYSE: RAI) at the top as it offers 5.2% yield, while British American Tobacco plc (NYSEMKT: BTI) offers a yield of 4%. As a side note, Reynolds also had higher operational profitability (“OP”) during the second quarter of 2012 than Altria or PMI: Reynolds’s OP reached nearly 34%. British American’s operational profitability was also much higher than Altria’s at nearly 37% during the first half of 2012.
Final Thoughts
This analysis shows that for those who contemplate between the major tobacco companies in particular between PMI and Altria, I think this analysis shows that the latter has many advantages over the former.
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Disclaimer: The author holds no positions in stocks mentioned and does not plan to initiate positions within 120 hours of the posting of this article. This article is to be used for educational, research and informational purposes only and does not constitute investment advice. There are no guarantees, expressed or implied, of future positive returns in regards to the subject matter contained herein. Understand the risks inherent in investing before making the decision to invest or consult an investment professional for more information. Reasonable due diligence has been performed in regards to the information in this article. However, the author expressly disclaims any liability for accidental omissions of information or errors in fact.
